A Weekend of Worry
Tests Big U.K. Lender
By CARRICK MOLLENKAMP and JASON SINGER
September 17, 2007
After a weekend of worried customers crowding to withdraw their deposits -- more than £1 billion ($2 billion) -- British mortgage bank Northern Rock PLC faces a crucial week in its efforts to salvage an increasingly beleaguered business.
Amid United Kingdom television broadcasting scenes of lines at bank branches and screaming newspaper headlines such as the Daily Mail's "How safe is our money?," the Financial Services Authority, the U.K.'s financial regulator, took the rare step of issuing a statement Saturday night in support of the bank.
"If we believed Northern Rock was not solvent, we would not have allowed it to remain open for business," the FSA said. Northern Rock says it has funding to cover withdrawals.
With each passing day, though, options are looking more stark for Northern Rock, the latest focus of the credit crisis that began in the U.S. subprime market. They include trying to muddle through, selling the business in whole or in parts to other banks, a forced sale at a token price organized by regulators, or a winding down in which regulators would likely ask other banks to take over Northern Rock's deposits.
Over the past few days, customers have withdrawn about 4% of Northern Rock's total deposits. That amount is expected to rise significantly in coming days as customers withdraw through post-office accounts. Another concern for Northern Rock is the potential loss of support from third-party independent financial advisers, who have helped drive its mortgage business.
"There is a lot of franchise damage happening," said Alex Potter, an analyst at U.K. research firm Collins Stewart.
People familiar with the situation say the Newcastle-based lender, the U.K.'s fifth-largest mortgage company by volume of loans outstanding, approached potential suitors long before Friday, when the Bank of England stepped in with an emergency line of credit, the first such bailout in more than a decade. The most likely suitor remains Lloyds TSB Group PLC.
Talks between Lloyd's and Northern Rock, headed by Chief Executive Adam Applegarth, ran into difficulties over the Bank of England's reluctance to provide financial support for the deal, people familiar with the situation say. Offering funds at a market rate to subsidize a deal would fly in the face of the central bank's policy, which is to penalize troubled banks by providing emergency funds only at a higher rate.
"The Bank's role is to protect depositors to avoid a loss of confidence in the banking system and the damage that flows from that, rather than Northern Rock as such," said a person at the Bank of England.
If Northern Rock can't reach a deal, people familiar with the matter say, its equity and certain other obligations could be valued at a token price in a sale approved by the central bank and the FSA. A decade ago, the prestigious investment bank Barings Bank was similarly sold for a token £10 after a rogue trader caused billions in losses.
Barring a sale of Northern Rock in its entirety or in parts, regulators could allow the bank to go out of business, shifting its deposits to other banks. Northern Rock hasn't tapped the emergency funding from the Bank of England, people familiar with the matter say.
The U.K. has meager insurance coverage for bank deposits compared with U.S. federal insurance, which covers most deposits up to about $100,000. The Financial Services Compensation Scheme, the U.K.'s fund of last resort for financial-services customers, covers 100% of the first £2,000 ($4,000) and 90% of the next £33,000, for a total of £31,700.
However, Northern Rock depositors aren't eligible for coverage, so far. According to the program's Web site, coverage applies only if a bank "cannot pay claims. That is not the situation" with Northern Rock.
Northern Rock's troubles cast a new chill on the U.K. housing market, which already was showing signs of slowing. While the U.K. economy has shown little sign of weakness, housing sales have slowed in recent weeks, and prices are beginning to soften. Agency Rightmove PLC said Friday that home prices had fallen 2.6% in the early weeks of September, compared with August prices.
Meanwhile, the cost of borrowing is on the rise, as banks demand higher interest rates to bear the risk of lending to one another. Last week, U.K. mortgage units of Banco Santander SA, Standard Life PLC and HBOS all had increased interest rates on mortgages. |
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